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  • Speculative Fever in China: Part 1 A View from the Ground 3 comments
    Jun 11, 2010 10:14 AM | about stocks: TAO, FXI

    Chinese people love status symbols. While it is true that Chinese people in general are big savers, they save for a single purpose: to buy things that show people how rich they are. In the past six months the volume of luxury cars I see every day on China’s clogged streets has exploded. A year ago I would see a few Mercedes and BMWs each day, but now I daily see dozens of them along with Porches, Lexus’ and the occasional Lamborghini (usually driven by a 20-something with a baseball cap listening to rap music.)

    Being rich is everything in China. These days a woman’s parents insist that any man she marry must have a new car and a new apartment (no small feet in China.) This weighs men down with enormous pressure and has fostered an out of control get-rich-quick mentality of using all the capital you have and all that you can borrow to make as much money as soon as possible.

    I meet so many more rich Chinese people than I did two years or even ten months ago. I have made a hobby in China of always asking anyone with money, “how did you make your fortune?” Invariably, the answer is always the same: real estate. Whether it is putting up apartment buildings, speculating in real estate or the corrupt government official who gets paid off to award a no-bid contract, everyone is getting rich off of the real estate boom (it’s used to be exporting whenever I asked, but in the past two years everyone I ask always attributes their wealth to real estate.) Speculative fever has gotten to almost everyone I know: professors are pre-buying un-finished student dormitories then flipping them, businessmen are taking their profits and buying three or four apartments, anyone who has a relative working at a bank is trying to leverage that connection to get as many loans as possible to buy before getting “priced out of the market.” This is a phrase I hear all the time, and it always reminds me of scared Americans in 2006 who took out jumbo mortgages to “buy before it’s too late.”

    Look out of any window in a Chinese city and you will most likely see one or more cranes constructing 20+ storey apartment buildings or a shopping center. Yet, when I look out at night at recently completed apartment complexes I see something astonishing: there are no lights on – no one is home. I remember a few months ago going to a six building, thirty storey apartment mega-complex with more than four hundred units just to ask about what kind of people lived in such place. The guard I ran into said he didn’t know what kind of people lived in such a place either, because as of yet, no one had bought one of the units and actually moved in. It was all speculators anticipating future demand. The place was a ghost town.

    Drive to the outskirts of a Chinese city and you will encounter, among the fields where China’s poor peasants still toil, monolithic residential complexes – all empty. Think of the future, I am always told. The peasants will all move to the cities, the immigration will be endless and the profits bigger than endless. I too wish that one could see the future by shining a mirror on the history of the past and guide oneself like Perseus slaying Medusa, but it isn’t always that easy folks.

    In my next post I will give you the hard facts about why a sustained real estate boom in China is not only unlikely, but impossible. I will outline some Chinese ADRs that have an interesting non-linear relationship to the Chinese housing sector and thus have not yet accumulated significant short interest from the China bears who have begun to speculate against China this past year. For now please think twice before buying real estate ETF (NYSEARCA:TAO), or a Chinese banking and large-cap ETF (NYSEARCA:FXI), or making a physical investment yourself in Chinese real estate, as so many Westerners and Western corporations are now doing.

    I am short FXI
    Stocks: TAO, FXI
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Comments (3)
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  • Danny Furman
    , contributor
    Comments (1009) | Send Message
    This is really insightful and much appreciated by someone trying to understand China from afar. Any chance I could get your thoughts on ADRs UTA, CBEH, NEP, AOB... any number of Chinese small caps trading at 5-10x earnings? Many have issued additional shares way below market price, seemingly to grab every bit of cash they can. FUQI's accounting fraud is something that once was prevalent in China and hasn't scared many here about it being a big issue.


    They all have ugly charts but have fallen so far that many look "too cheap" to me, almost as cheap as they were 15 months ago.


    Is everything we hear about China a scam, with just enough activity going on in tourist areas to appease curious Ivy Leaguers? Or is there a foundation, built intentionally too early, for growth that may be slow now but will accelerate soon? Any thoughts would be appreciated.


    Publishers may prefer facts but I, for one, would rather read extrapolation when I can't see something for myself. Thanks Ethan!
    8 Jul 2010, 07:54 AM Reply Like
  • Ethan Backus
    , contributor
    Comments (6) | Send Message
    Author’s reply » Well, in fact, the reason I study Mandarin is because I really want to analyze Chinese stocks in Chinese and really be able to figure out if they are scams or not. Chinese small caps are just so shifty, right now NEP has some sort of class action lawsuit against it by shareholders because of fraud. I considered buying AOB back in the March 2009 lows, but it's down 30% since then when the market is up 60%! I don't know what is wrong with so many of these stocks that are selling for very low P/Es, if nothing was wrong with them you could certainly make a lot of money buying them. Are people just scared, or are they really all crap? Thanks for the comment Danny! So many people were down on my last article, which leads me to believe China must really be a bubble if people can get that emotional about a financial investment...
    8 Jul 2010, 10:45 PM Reply Like
  • JPrent
    , contributor
    Comment (1) | Send Message
    Hi Ethan! If you are interested in getting another affirmation of your point of view, all you need do is talk to my fiance, Chuan Liang. He speaks Mandarin fluently, and not only that, he tells me the exact same things you mention here daily. Take the time to pick his brain, and I think the two of you will hit it off. Ask him anything about economics and he will basically talk your ear off. :) Take it from me. :) Also, he is not a very good writer; the two of you could talk shop and you could take the writer's credit for some of his more brilliant deductions.
    1 Aug 2011, 03:39 PM Reply Like
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